The what, why and how of the global fixed income and municipal markets
The evolving fixed income market environment Key 2023 themes
- Softer U.S. growth outlook
- Global macro trends follow the U.S.
- Major central banks done tightening
- Fiscal policy support diminishing
- Much higher yields make fixed income more attractive
- Favor spread sector and credit risk, with an up-in-quality bias within asset classes
- Credit spreads are poised to widen in the coming months, likely presenting more attractive entry points for risk taking
- Diversified overweight to spread sectors with an up-in-quality bias
- Currently see some attractive opportunities in preferreds and BB rated high yield and senior loans
- Advocate deep research, favoring idiosyncratic stories with positive long-term growth prospects
2023 municipal market themes
Municipal bond market
- Inflation has softened in recent months via goods and the rollover of housing costs, providing favorable trajectory entering 2024. Core services inflation excluding housing remains sticky but is starting to trend down.
- The fed funds rate has risen by 525 bps during this cycle. Fed policy remains data dependent, with a focus on core services inflation. We expect rate cuts in 2024 with the timing dependent on inflation, wages and employment data.
- U.S. growth should trend lower as the impact of Fed policy is fully absorbed. Key factors include interest rates, geopolitical issues and declining money supply. While a soft landing is possible, once the economy begins moving in one direction, it tends to stay on course absent outside forces.
- Uncertainty regarding the end of Fed policy will continue to cause rate volatility. Rates could continue to decline if a slowdown or recession develops.
Municipal market environment
- Credit remains strong, with robust levels of rainy day and reserve funds. While revenue collections are below peaks witnessed in 2022, they remain above prepandemic levels. We expect municipal defaults will remain low, rare and idiosyncratic.
- Supply throughout 2024 could hover near levels seen in 2023. Predictions include more coupons, calls and maturities than new issues. Demand has favored owning duration, which could continue/accelerate in 2024. Investors don’t want to miss out, driving demand. Yields remain attractive despite a strong rally in November. Demand could increase in 2024 as investors gain conviction Fed is done hiking.
- Municipal performance continued to rebound in December, after a very strong November. Absent a meaningful catalyst, municipals can still post attractive returns based on elevated income generation from adjusted rates. Long-term tax-exempt and taxable municipal valuations are attractive on a spread basis, compared to similar maturity U.S. Treasuries and corporate bonds.
Finding opportunities in fixed income markets can be challenging. Unless you know where to look. Download our key municipal and global fixed income charts to learn more.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her professionals.
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A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk.
Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
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